Gold Gets Crushed Again

Friday’s decline of 3.1% in gold (GLD) brought the precious metal’s yearly decline to more than 25% as it has fallen from the $1650/oz level to Friday’s close of $1212. The sell-off this time was due to the strong monthly jobs report which led to a spike in interest rates, a spike in the U.S. dollar (UUP) and more conviction that the Federal Reserve would end it’s easy money policies sooner rather than later.

On a technical basis, gold (IAU) is locked in a strong bear market, however, is reaching oversold levels. So a great debate is now breaking out over whether now is the time to buy or is the twelve year bull market over and lower prices still lie ahead?

Bulls make several viable arguments:

1. Gold is a good way to diversify portfolios.

2. The cost of the metal is nearing or below the cost of production and so miners will soon stop production which will crimp supplies and hike demand.

3. Gold has always been seen as a store of value in the age of fiat currencies.

4. Demand continues from India and China in the retail sector and from several central banks around the world.

Bears, on the other hand, point out that we’re in a new world now that the Federal Reserve appears ready to cut back on its asset buying program:

1. Interest rates will rise which is negative for gold.

2. The dollar will rise which is negative for gold.

3. If the U.S. economy continues to improve, there will be less demand for a “flight to safety” trade.

4. With still relatively weak employment and economic growth, inflation is likely to remain low and so precious metals lose their luster as an inflation hedge.

Many hedge funds have been on the wrong side of the recent declines in gold and institutional selling has added to the magnitude of the recent rout in bullion and other commodities. Producers have also been hurt by the recent decline with Barrick Gold Crop, (ABX) the biggest producer of gold in the world, losing 6% on Friday and Newmont Mining, (NEM) a member of the S&P 500, (SPY) falling 4.3%.

For now, it appears that gold prices could head still lower as the Federal Reserve unwinds its quantitative easing programs and the price hasn’t yet fallen below the cost of production.

Gold bears can consider the following ETFs:

PowerShares DB Short Gold ETN (DGZ) This ETN tracks the inverse daily performance of the Deutsche Bank Optimum Yield Gold Excess Return Index and uses a single gold futures contract.

ProShares UltraShort Gold (GLL) This leveraged ETF is designed to produce 200% the inverse of the daily performance of gold bullion.

Gold bulls can think about these ETFs:

SPDR Gold Shares (GLD) This ETF tracks the price of gold bullion and is the world’s largest gold ETF.

ProShares Ultra Gold (UGL) A leveraged gold ETF designed to deliver 2X the price of the underlying price of gold bullion.

Of course, leveraged ETFs come with their own caveats and cautions and so investors need to understand how these work before venturing into these volatile waters.

Bottom line: Speculators and investors, bull and bear alike, will be watching for opportunity in the fast moving world of gold bullion. Investors with a contrarian streak and long term time horizon could start to see value at current levels and perhaps try to “catch the falling knife” while technicians see still lower prices ahead. While the future direction of gold, particularly over the short term, remains cloudy, the “barbarous relic” will always fascinate investors, and this fast moving market will provide ongoing opportunities for nimble traders with well thought out trading and risk management strategies.

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